Oct. 18 (Bloomberg) -- Daniel Lubin, whose family wealth
comes from a maker of diaper-rash cream built by his grandfather
and later acquired by Pfizer Inc., is taking more control of his
fortune.

Lubin, 52, chairman of Upsher Asset Management, a so-called
single-family office that oversees the assets of his family and
three others descended from his grandfather, is shifting capital
from outside funds into direct investments. Family offices
increased their direct allocations to private companies and real
estate last year to an average of 11 percent from 6 percent in
2009, according to a study to be released today by the Wharton
Global Family Alliance.

“If you have a third or half of your portfolio where
you’re paying 2 and 20, suddenly you’re saying, ‘You know what,
these guys are eating up half of my return,’” Lubin said of
fees charged by many private equity and hedge funds,
traditionally 2 percent of assets and 20 percent of profits.
“That doesn’t make any sense. There’s got to be a better way.”

Single-family offices are investing directly because of
declining fund returns and concerns that some outside managers
charge high fees and may have conflicts of interest, according
to Wharton. The offices generally are dedicated to the
investment oversight and financial planning of one clan. They
usually serve families worth at least $100 million, such as
those of computer maker Michael Dell and Microsoft Corp. co-founder Bill Gates.

Upsher Asset Management devotes about 7 percent of its
assets to direct investments in private companies or real
estate, compared with none five years ago, said Lubin, who is
also managing partner of the New York-based venture-capital firm
Radius Ventures LLC.

‘Profound Changes’

“There are profound changes that occurred as a result of
the 2008 and 2009 economic recession and financial crisis,”
said Raphael “Raffi” Amit, chairman of the Wharton Global
Family Alliance, a unit of the University of Pennsylvania’s
Wharton School in Philadelphia that focuses on wealthy families
and their businesses.

Families reported a fivefold increase in their allotments
to art collections and precious metals, which made up 5 percent
on average in 2011, according to the study.

They cut their average outlay for private equity funds to 9
percent from 11 percent two years earlier. The average portion
in hedge funds stayed the same at about 12 percent, while
investments dedicated to funds of funds dropped to almost zero.

Conflict Potential

“We see almost a move completely out of fund of funds,”
Amit said. “These trends are a result of poor performance of
fund of funds and the deep concern that family offices have
about conflicts of interests at large financial-service
companies. That’s something that the big banks have to take
notice of.”

Funds of hedge funds lost an average of 3 percent annually
in the four years through 2011, according to Bloomberg’s indexes
for funds. Funds of funds seek to minimize risk a client would
have from investing with a single manager. They generally add a
layer of fees on top of the cost of the underlying investments.
Funds of funds charge an average 7.6 percent performance fee and
1.3 percent management fee, according to data compiled by
Bloomberg.

The Wharton report is based on a survey of 106 families
from 24 countries conducted last year. About 41 percent of the
respondents were based in the Americas. Amit declined to release
country-specific data to preserve confidentiality. Sixty-three
percent of respondents held more than $500 million in assets.

Privacy, Control

Advantages of single-family offices include privacy,
control and customization. There probably are about 400 in the
U.S. with more than $500 million in assets that provide
investment management, administrative and family services as
independent firms with their own staffs, Amit said.

“People were a little less focused on what it cost to
invest and what we were paying managers to get their
expertise,” before 2008, said Lubin. Since then many family
offices have become more focused on risk management, liquidity
and fees as returns declined.

Along with paying management and incentive fees, clients in
private-equity and hedge funds may be required to commit their
money for a period of years.

The median private-equity fund that made its first
investment in 2003 produced a 12 percent internal rate of return
as of the end the first quarter, compared with 8.8 percent for
funds that started in 2008, according to data compiled by
Seattle-based researcher PitchBook Data Inc.

Real Estate

Lubin’s family office brought in a new adviser for its
hedge-fund strategy, hired managers to add investments in
commodities and precious metals, and is building its own real
estate portfolio, he said. The firm has done more direct deals
in industries it’s familiar with such as health care since the
financial crisis rather than using a fund that may charge high
fees and have a lock-up period.

The single-family office this year purchased units in New
York’s condominium market to rent, he said.

“We will continue to methodically add to the portfolio
over the next several years,” Lubin said.

“Families found that some of their providers really were
conflicted” by fees from certain products or trading revenue,
said Laird Pendleton, co-founder of the CCC Alliance LLC, a
private consortium of single family offices based in Boston.
“People are in-sourcing much of that now.”

Adding Staff

Single-family offices saw a 25 percent increase in staff
hired to select investment managers and a 12 percent expansion
in those dedicated to monitoring performance, according to the
Wharton study.

Pendleton also is co-founder and principal of Cairnwood
Cooperative Corp., an office that manages his family’s wealth
into its sixth generation. Pendleton, 57, said his great-grandfather in 1883 started Pittsburgh Plate Glass Co., known
today as PPG Industries Inc. The family has increased its direct
investments in venture capital and private companies since 2008,
he said.

“The crisis showed that a lot of hedge funds and other
investments in the alternative area are really a handshake
deal,” Pendleton said. “There is in many cases a very weak
mechanism for being able to go in and remove your assets from a
fund.”

He and Lubin declined to disclosed their family offices’
assets under management.

Dell, Gates

Dell, the founder, chairman and chief executive officer of
computer maker Dell Inc., formed a money-management firm called
MSD Capital LP in 1998 dedicated to investing his family’s
assets. The firm has more than $12 billion under management and
a staff of about 80 people. It is focused solely on investments
for the family in asset classes including publicly traded
securities, private equity and real estate.

Todd Fogarty, a spokesman for New York-based MSD, declined
to comment on the firm’s investments.

Cascade Investment LLC is the personal holding company
dedicated to Microsoft co-founder Gates’s investments. The
Kirkland, Washington-based firm oversees about three-quarters of
Gates’s $64.6 billion fortune, according to data compiled by the
Bloomberg Billionaires Index. Bridgitt Arnold, a family
spokeswoman, declined to comment.

About 52 percent of single-family offices reviewed their
investment policies this year, compared with 40 percent in 2011,
according to a separate study released yesterday by the Family
Wealth Alliance, a research and consulting firm. About 27
percent made changes such as placing more emphasis on capital
preservation, short-term liquidity and diversification, said
Robert Casey, senior managing director for research at the
Wheaton, Illinois-based firm.

Ideal Structure

The Family Wealth Alliance study is based on responses from
34 offices, Casey said.

The most successful single-family offices are structured
with investment-policy statements, succession-plan documents,
education for younger generations and staff dedicated to
selecting investment managers and monitoring portfolios, the
Wharton study found. High performers had a five-year net return
of more than 6 percent annually, Amit said.

“A family can have the best investment advice, estate
planning, legal and accounting advice at their disposal,”
Pendleton said. “If they have a weak family governance system
they can wipe out $1 billion in short order.”